LOWE'S COS INC (NYSE:LOW) – A Strong Dividend Stock with Reliable Yield and Solid Profitability

Dividend investing aims to find stocks that provide steady and lasting income through regular payments, while keeping financial stability and profitability. The "Best Dividend" screen selects companies with a high ChartMill Dividend Rating (≥7), indicating strong dividend traits, along with a minimum Profitability Rating (≥5) and Health Rating (≥5) to confirm the company’s ability to maintain payouts without harming its financial standing. This method balances yield, growth, and safety, key elements of effective dividend investing.

LOWE'S COS INC (NYSE:LOW) stands out as a strong choice under this strategy, showing solid dividend performance along with good profitability and reasonable financial health.

Dividend Strength: Reliable Yield and Growth

• Good Yield with Growth: LOW provides a 2.20% dividend yield, better than 82.8% of its competitors in the Specialty Retail sector. While the yield is not the highest, its consistency and growth path are notable. The company has raised its dividend at a 16.9% annual rate over the last five years, showing a dedication to shareholder returns.
• Payout Stability: With a payout ratio of 37.8%, LOW keeps enough earnings to reinvest in its business while continuing dividends. This ratio is far below the risky level (usually >80%), lowering the chance of cuts even in tough times. However, the report mentions that earnings growth has been slower than dividend growth lately, a detail investors should watch.
• History of Reliability: LOW has paid dividends for at least 10 straight years without cuts, placing it among trustworthy dividend stocks. This longevity reflects disciplined financial management.

Profitability: High Margins and Returns

LOW’s Profitability Rating of 8/10 highlights its efficient earnings generation:

• Strong Returns on Capital: The company’s Return on Invested Capital (ROIC) of 34.1% is in the top 1.6% of its industry, showing excellent use of capital. Its Operating Margin (12.4%) and Profit Margin (8.2%) also beat 88.5% and 85.3% of peers.
• Steady Cash Flow: LOW has produced positive operating cash flow every year for the past five years, ensuring it can support dividends without heavy borrowing.

Financial Health: Mixed with Some Liquidity Issues

LOW’s Health Rating of 5/10 shows a balanced but imperfect situation:

• Solvency Strength: An Altman-Z score of 3.46 (above the safe level of 3.0) and a falling debt-to-assets ratio suggest low bankruptcy risk. The company’s debt-to-free-cash-flow ratio (5.2 years) is acceptable and better than 64.8% of industry peers.
• Liquidity Weakness: A Quick Ratio of 0.19 (much lower than the industry average) indicates reliance on inventory sales to cover short-term needs. This is typical in retail but deserves caution during economic dips.

Valuation and Growth: Fairly Valued with Steady Expansion

• Reasonable Price: LOW trades at a P/E of 19.05, less expensive than 72.1% of its sector and slightly below the S&P 500 average (27.35). Its forward P/E (16.69) also supports a fair valuation.
• Moderate Growth Prospects: Revenue and EPS are projected to grow at 2.9% and 8.0% per year, respectively, solid but not outstanding. The recent drop in EPS growth (-4.9% YoY) is a concern, though the long-term trend stays positive.

Conclusion

LOWE'S COS INC offers a well-rounded option for dividend investors, pairing a rising payout with strong profitability and acceptable financial risks. While its liquidity and slower earnings growth need attention, its high ROIC, sustainable payout ratio, and reliable dividend history make it a good fit for long-term income strategies.

For investors looking for similar dividend-focused stocks, check the full results of the Best Dividend Stocks screen.

Disclaimer: This analysis is not investment advice. Always do your own research or consult a financial advisor before making investment decisions.